It’s been a slow drip down in early European trade today as equity markets gave up their early Asia session gains and moved lower all morning on the realization that the coronavirus impact may be a long and tedious battle.

The rate of infection in the US appears to be ticking up with California now declaring a state of emergency as it monitors more than 9000 possible cases. Airlines have continued to issue warnings as travel may be off by as much 70%, And with swaths of China and parts of Europe still on effective lockdown, the rebound in economic activity may take longer than hoped.

All of this has put a damper on investor sentiment and futures were pointing to a 2% down open after yesterday’s 4% rise. The up-down nature of the markets will no doubt continue but the prospect of fresh will grow dimmer with every passing day as investors begin to take the true toll of the virus on economic activity.

In FX the euro continued to push higher rising to 1.1177 in morning London dealing. The move is less a function of confidence in the euro than flow out of dollar assets. With markets pricing in yet another 50bp cut by the Fed the one attraction of US assets – their positive yield – is losing much of its luster.

If the coronavirus forces all the G-3 rates to normalize around zero much of the greenback’s advantage will evaporate. Add to that the fact that euro is now a funding currency in many risk trades that will need to be unwound and that CFTC positioning still suggests a strong short bias and you have the perfect recipe for a vertical move to 1.1400 or higher.

Author

Boris Schlossberg

BKTraders and Prop Traders Edge

Boris Schlossberg was key speaker at the FXstreet.com International Traders Conferences 2010. Mr. Boris Schlossberg is a leading foreign exchange expert with more than 20 years of financial market experience.

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